Based on comments from withholding agents about difficulties in transitioning to the electronic filing of Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, the IRS said Tuesday that it is delaying the e-filing requirement.

The IRS announced in Notice 2024-26 that U.S. withholding agents are administratively exempt from the e-filing of Form 1042 required to be filed in calendar year 2024. Foreign withholding agents are administratively exempt for calendar years 2024 and 2025. The administrative exemption from the e-filing requirements for Form 1042 is automatic, and withholding agents are not required to request a waiver.

In February 2023, the IRS published final regulations on e-filing rules for certain returns and other documents. Those regulations implemented the Taxpayer First Act, P.L. 116-25, amendments to Sec. 6011(e). The regulations for Forms 1042, which apply beginning with those due on or after March 15, 2024, apply in three situations:

• When the withholding agent is required to file 10 or more returns of any type during the same calendar year in which Form 1042 is required to be filed. Previously, the threshold for filing electronically was 250 returns.
• When a withholding agent is a partnership with more than 100 partners, regardless of the number of returns the partnership is required to file during the calendar year.
• When a withholding agent is a financial institution, regardless of the number of returns the institution is required to file during the calendar year.

Since the publication of the final regulations, withholding agents told the IRS of problems they face with e-filing Forms 1042 and requested a deferral of the requirements. Among the concerns expressed were:

• The “limited number” of IRS-approved e-file business providers for Form 1042, “coupled with difficulties accessing the schema and business rules for filing Form 1042 electronically”;
• The additional time needed to upgrade their systems for filing on the IRS platform; and
• Specific challenges facing foreign persons filing Forms 1042 with respect to implementing the authentication requirements necessary for accessing the IRS platform.

Before the final regulations were published, the IRS received similar comments, according to the publication in the Federal Register a year ago. “The majority of commenters recommended delaying the applicability of the proposed changes by at least one calendar year to provide time for their customers to adjust inventories; for software companies to adjust their programming; for paper filers and the IRS to adjust their processes; and for the IRS to communicate the changes to the public,” the final regulations said.